What is the 200-day moving average?
The "200-day moving average" is a technical indicator that deciphers price fluctuations in the market from a sophisticated perspective to help you make better investment and trading decisions. This article provides a thorough explanation of its basic concepts and specific applications. While it is an excellent tool in identifying trends and entry points, we will also focus on points that require caution and provide information to assist you in your investment strategies.
By the end of this article, you will have acquired a broad knowledge of the 200-day moving average in trend analysis, from its fundamentals to its applications, and will have developed the ability to accurately identify market trends. Furthermore, you will be able to chart a path to improving your probability of success in trading and investing by practicing the application and understanding the precautions to take.
First, we will explain the essential meaning and role of the 200-day moving average.
What is the 200-day moving average?
The 200-day moving average is an important technical indicator widely used in the financial markets. It is a powerful tool for smoothing out price fluctuations and identifying long-term trends. First, let's understand the essential meaning and role of the 200-day moving average. We will also explain how it is calculated, why it is essential in trend analysis, and how it can affect your investment strategy.
How the 200-day moving average works
The 200-day moving average is a line formed by averaging prices over the past 200 days. This line serves to eliminate price "noise" and clarify the underlying direction of the market. Specifically, an upward trend is interpreted as the existence of a long-term uptrend, while a downward trend is interpreted as the existence of a long-term downtrend. This 200-day moving average is particularly useful in long-term investment strategies because it smoothes out short-term movements resulting from daily price fluctuations.
Furthermore, a comparison of the 200-day moving average with other moving averages, such as the 28-day moving average and the 90-day moving average, reveals its characteristics and merits: the 28-day moving average is better suited to capture short-term market movements, while the 90-day moving average is more effective in indicating medium-term trends. The 200-day moving average, however, is characterized by its ability to indicate long-term market trends and is less susceptible to temporary price fluctuations.
For this reason, the 200-day moving average is less susceptible to short-term noise and medium-term fluctuations and provides a more stable market direction. This characteristic makes it very useful for long-term investment strategies and makes it a reliable indicator for many traders and investors.
How to calculate the 200-day moving average
Calculating a 200-day moving average is relatively simple, but the method of calculation differs depending on its type. In general, there are simple moving averages (SMA) and exponential smooth moving averages (EMA).
Simple Moving Average (SMA): is calculated by summing the closing prices over the past 200 days and then dividing by 200. This method gives equal weight to all historical price data.
Exponential Smoothed Moving Average (EMA): gives greater weight to the most recent price and is therefore more sensitive to price fluctuations; EMAs are said to reflect more recent market trends because they give more weight to the most recent data.
These two moving averages are selected according to the investment style and objectives of the trader or investor: SMA is suitable for capturing stable trends because it reflects average price fluctuations. EMA, on the other hand, emphasizes the latest market trends and may be used for short-term trades or in situations where reaction to sudden price changes is required.
200-day moving average and trend analysis
The 200-day moving average is very useful, especially in long-term trend analysis: if the 200-day moving average is pointing up, the market is basically strong and many traders are likely to take buy positions. Conversely, if the line is pointing downward, the market is likely to be weak and many sell positions are likely to be taken.
In addition, it is also useful to combine the 200-day moving average (red) with other moving averages, such as the 28-day moving average (blue) or the 90-day moving average (orange), to see if they are in "perfect order”. A perfect order is a state in which the short, medium, and long moving averages are lined up in an orderly fashion.
Whether the 200-day moving average is actually working effectively in the market can be determined by whether the most recent candlestick is aware of this line. In the image above, we can see a drop back at the 200-day moving average and a rebound after a break above it.
Thus, the 200-day moving average can be used not only on its own, but also in combination with other indicators for more advanced trend analysis. In particular, understanding the relationship between multiple moving averages helps in recognizing the market environment.
How to use the 200-day moving average
The "200-day moving average" is a valuable source of information for traders and investors. And by utilizing this information, you will be able to identify current trends and predict future trends. Let's take a look at some specific uses, such as trend analysis and identifying entry points.
Use as a trend filter
The 200-day moving average is a very effective trend filter due to its long-term nature. If this line is pointing up, you should basically consider a buy position; if it is pointing down, you should consider a sell position.
Furthermore, these long-term moving averages are said to reflect the movements of large institutional investors and large investors, who are the real movers in the market. This is because of their large trading volume, which has a significant impact on market trends.
The above chart shows that the candlestick crossed above the 200-day moving average in late February 2021. The price then remained above the 200-day moving average until the end of December 2022. In other words, it can be understood that for about two years from February 2021 to the end of December 2022, the market environment was profitable if the entry was in the direction of a weaker yen.
Because the 200-day moving average has a very large time horizon, it is difficult to use it as a signal for a specific entry or settlement point, but it can be useful in understanding the larger market trend and which direction to enter to make a profit.
In this way, the 200-day moving average can be used as a trend filter.
Use as support and resistance lines
The 200-day moving average often serves as a support or resistance line as well.
If this line acts as a support line, the price is likely to rebound once it approaches the 200-day moving average; conversely, if it acts as a resistance line, the price is likely to be restrained to the upside when it approaches the 200-day moving average.
If the 200-day moving average is approached for the first time after a major trend, the possibility of a rebound or sellback is very high and could be used as a pushback or sellback point.
However, when it approaches the second one, we consider the possibility of a breakout. In fact, the dollar-yen chart above confirms that the price has rebounded and fallen back up to the second time, making it a perfect push and return high.
However, on the third approach, a breakout was made. This can be assumed to be because the limit order near the 200-day moving average has been resolved, allowing price to progress more easily. A breakout may be determined by confirming that the high is consistently cutting down and the low is cutting up.
Entry point
When price approaches the 200-day moving average, that line is likely to act as a support or resistance line. This characteristic can be used to identify entry points.
For example, if the 200-day moving average is acting as a support line, you can consider taking a buy position when it approaches that line. When identifying entry points, it is important to fully confirm that the market fundamentals have not changed and that the market is in a temporary struggle.
Particularly in the middle of an uptrend, you can find more reliable entry points by checking to see if there is an ascending triangle, if the lows are cutting up, or if the 200-day moving average continues to act as support.
Combining moving averages to identify trends
While the 200-day moving average is a very useful indicator in its own right, it can be combined with other short-term moving averages for even more sophisticated trend analysis.
For example, the combination with the 28-day and 90-day moving averages is often of particular interest. By checking the direction of the short- and medium-term moving averages, one can get a more detailed picture of current market movements.
In addition, the presence or absence of a band walk on the Bollinger Bands and signals such as "three-way positive" and "three-way negative" on the Ichimoku Kinko's Chart can also be used as references to determine the timing of entry more precisely.
In particular, the combination of the equilibrium chart and the 200-day moving average will make market analysis clearer.
Above is a daily chart of the dollar-yen with the Ichimoku Kinko's Chart and the 200-day moving average; with only the 200-day moving average, the price and the moving average are so far apart that it is difficult to determine whether the trend will continue.
When the Ichimoku Kinko Chart is used in combination with the Ichimoku Kinko Chart, there are more factors to determine an uptrend, such as whether the market is above the clouds, whether the lagging line is above the candlestick, and whether the conversion line is above the reference line, which allows for more clear market analysis.
It is also important to check for divergence in oscillator-based indicators. If divergence is observed, the possibility of a change in the direction of the market increases, so traders should proceed with caution.
Golden cross
A golden cross is a situation where a short-term moving average (e.g., 28-day moving average) crosses above a long-term moving average (e.g., 200-day moving average). This situation is often considered a strong buy signal. When a golden cross occurs, it is often considered the beginning of an uptrend, and many traders take buy positions at this time. In particular, taking into account the fundamental factors of the market when a golden cross occurs will help traders make more reliable trading decisions.
For example, if the interest rate differential between Japan and the U.S. is expected to widen, as in the case of the yen's depreciation in 2022-2023, the background and the timing of the golden cross can be considered together as a clear buy entry signal.
Dead cross
A dead cross is a situation where a short-term moving average (e.g., 28-day moving average) crosses below a longer-term moving average (e.g., 200-day moving average). This situation is often considered a strong sell signal. When a dead cross occurs, it is often considered the beginning of a downtrend, and many traders take sell positions at this time.
In particular, taking into account the market's fundamental factors when a dead cross occurs will allow for more reliable trading decisions.
For example, if the background to the high interest rate policy in the U.S. in 2023 is the possible outflow of funds from gold, the timing of the dead cross can be taken as a reliable sell entry signal by combining that background with the timing of the dead cross.
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Notes on the 200-day moving average
The 200-day moving average is a powerful technical indicator, but its use requires caution. Let's take a look at what you need to understand when analyzing price movements and trends.
Historical data and current market conditions may differ
The 200-day moving average is based on data from the past 200 days. Therefore, the release of a high-profile economic indicator or sudden news can be a factor that causes a break of this line or a change in direction.
In particular, when macroeconomic indicators such as central bank interest rate announcements or employment statistics are released, the 200-day moving average, which has functioned as a support or resistance line in the past, may suddenly lose its function.
For example, in 2023, inflation is the biggest market focus, and policy rate trends are the most important. Under these circumstances, it is important not to rely solely on the 200-day moving average, but to use other technical and fundamental indicators as well.
Each morning's market report from ThreeTrader also focuses on changes in fundamentals to help you make market decisions.
Slower reaction to sudden price changes
The 200-day moving average is designed to evaluate long-term trends and has the characteristic of being slow to react to sudden price changes. In fact, major directional movements in this line occur only a few times a year, and missing that timing can result in missing out on significant gains. Tools such as Bollinger Bands, Equilibrium, and GMMA are also effective. RSI is also an effective tool among oscillator-based indicators.
As a method, the 200-day moving average can be used to understand the general trend, but for precise entry points and superior trading points, it is better to use other tools. By understanding these characteristics and combining them with short-term indicators, more effective trading can be achieved.
False trade signals could occur
The 200-day moving average is certainly a powerful indicator, but because it is a large unit indicator, it is also subject to many false signals. Beards are also likely to occur, and these can be false trade signals. It is recommended to check the 200-day moving average in conjunction with other technical indicators, especially immediately after the price breaks through or approaches the 200-day moving average.
For example, you can avoid false signals by using oscillators such as RSI and MACD to check for overbought and oversold conditions. In addition, you should utilize multi-timeframe analysis. Checking to see if the signal is in the same direction in the upper legs and what is happening in the other time frames will likely prevent false signals. By taking this approach, you can utilize the 200-day moving average more effectively and reduce the risk of false signals.
Utilizing the 200-day moving average with ThreeTrader
ThreeTrader is a versatile trading platform, of which grid trading is a particular standout: combining the 200-day moving average with grid trading allows for more efficient trading.
Grid Trading: The 200-day moving average is useful for identifying long-term trends, but grid trading can be applied on top of it to profit from short-term price fluctuations as well. For example, if the 200-day moving average is pointing upward, you can set up a grid that follows that trend direction to efficiently accumulate profits while diversifying risk.
How to Set Up: Grid trading is very easy to set up in ThreeTrader. Simply display the 200-day moving average in the platform and set the grid to match that line. This allows you to trade short term in line with long term trends.
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Summary｜200-day moving average
The 200-day moving average is a powerful tool for identifying market trends and building trading strategies. In fact, it is useful in analyzing trends and identifying entry points. However, a caveat should not be ignored. Because it is based on historical data, it requires a flexible response to market fluctuations, and you should be wary of slow reactions to sudden price changes and false trade signals.
Successful trading requires the skill to combine the 200-day moving average with other indicators and to be flexible to market conditions. Accurate trend analysis and rational decision making will make your investment strategy more reliable. Be aware of the points to watch out for and use the 200-day moving average to improve your chances of trading success.
